Asset efficiency ratio analysis
Asset efficiency ratio
Asset efficiency ratios measure the efficiency with which an entity manage its current and non-current investments, and converts its investments decisions into sales dollars.
There is a continuously increasing trend of asset turnover ratio for company alpha since 2009, from 3.77 times to 4.41 times. In comparison with company alpha, company beta shows a relatively slow increasing pattern from 0.90 times to 1.18 times. By contrast, it indicates that although both companies’ ability to convert a dollar investment in assets into sales revenue dollars has improved as well as their internal management in managing their assets over the past 4 years, company alpha, who has a relatively higher ratio, has shown a more successful and efficiency strength on using its asset to generate revenue in general. We need to be aware, however, this may be caused by using different pricing strategy. As low profit margin tends to have a high asset turnover ratio, in this case, company alpha has a relatively low profit margin stays below 10%, where company beta, who is generally above 15%. This suggests that the company alpha in order to achieve its desired profits by lowering its price to increase its sales amount.
If the ratio is increasing over time, it means that the company is becoming more efficient in generating revenues. The major problem with calculating and using the asset turnover ratio is that it includes all assets, not just those equipment and plant, that directly impact revenue. For example, it includes non active assets such as inverstment portfolios and accounts receivable. Neither of these assets are directly involved with bringing in more revenue and can skew the ratio.
This ratio does not work for service-oriented businesses.
There is a continuously increasing trend of asset turnover ratio for company alpha since 2009, from 3.77 times to 4.41 times. In comparison with company alpha, company beta shows a relatively slow increasing
Asset efficiency ratios measure the efficiency with which an entity manage its current and non-current investments, and converts its investments decisions into sales dollars.
There is a continuously increasing trend of asset turnover ratio for company alpha since 2009, from 3.77 times to 4.41 times. In comparison with company alpha, company beta shows a relatively slow increasing pattern from 0.90 times to 1.18 times. By contrast, it indicates that although both companies’ ability to convert a dollar investment in assets into sales revenue dollars has improved as well as their internal management in managing their assets over the past 4 years, company alpha, who has a relatively higher ratio, has shown a more successful and efficiency strength on using its asset to generate revenue in general. We need to be aware, however, this may be caused by using different pricing strategy. As low profit margin tends to have a high asset turnover ratio, in this case, company alpha has a relatively low profit margin stays below 10%, where company beta, who is generally above 15%. This suggests that the company alpha in order to achieve its desired profits by lowering its price to increase its sales amount.
If the ratio is increasing over time, it means that the company is becoming more efficient in generating revenues. The major problem with calculating and using the asset turnover ratio is that it includes all assets, not just those equipment and plant, that directly impact revenue. For example, it includes non active assets such as inverstment portfolios and accounts receivable. Neither of these assets are directly involved with bringing in more revenue and can skew the ratio.
This ratio does not work for service-oriented businesses.
There is a continuously increasing trend of asset turnover ratio for company alpha since 2009, from 3.77 times to 4.41 times. In comparison with company alpha, company beta shows a relatively slow increasing